OECD: UK has begun slide into double-dip recession

Britain has already begun to slide back into recession, the Organisation for
Economic Co-operation & Development (OECD) has warned, as it predicted
that the Bank of England will pump another £125bn into the economy to try to
salvage the recovery.

The collapse in growth will be accompanied by a fresh surge in unemployment next year, now forecast to peak at 9.1pc in 2013, far above the current 8.3pc putting another 400,000 workers out of a job, on top of the 2.62m already unemployed. To address issues of long-term youth joblessness, the OECD urged the Government to establish “labour training” as part of a plan to stimulate growth.

The bleak outlook comes the day before the Chancellor unveils a package of measures in his Autumn Statement to help lift the economy. Increased infrastructure spending and help for small businesses are planned in response to what is expected to be official recognition that the recovery has come off the rails.

Growth in the final three month of this year is expected to contract, albeit by about 0.025pc, and to fall by a further 0.15pc in the following three months. The two successive quarters of contraction would plunge Britain back into a technical recession for the first time since the third quarter of 2009.

The UK will bounce back from the mild recession to record growth of just 0.9pc this year, 0.5pc next and 1.8pc in 2013 – extending the period of below-trend growth to six years, making it the slowest recovery in over a hundred years. The eurozone crisis is partly to blame, but the OECD also cited the austerity programme as well as the household squeeze.

If downside risks materialise, the OECD suggested the Treasury alter its austerity programme. “Short-term fiscal support would be warranted, for example by easing up on the planned cuts in public investment, temporarily slowing consolidation in relation to government plans,” it said.

However, to retain the confidence of bond markets and protect the UK’s low borrowing costs, the Government would have to commit to back-ending deeper cuts, “implying greater tightening later on”, the OECD said. Despite the warning, it urged the Government to stick to the cuts.

“The ambitious fiscal consolidation has bolstered credibility and helped maintain low bond yields,” it said. On its forecasts, which are calculated on a different basis than official UK figures, Government debt will breach 100pc of GDP in 2013. As a result, it added: “Planned fiscal consolidation tightening needs to continue despite the significantly weakening economic outlook.”

Inflation will fall back towards 2pc, it said, but – to support growth – the Bank of England will have to hold rates at 0.5pc until the end of 2013 at least and conduct another £125bn of quantitative easing, taking its total to £400bn – which would give the central bank 40pc of the total stock of UK Government bonds.

The way back to economic prosperity will be slow. “With household consumption falling, government spending shrinking and export growth slowing, the economy is weakening. Continued fiscal retrenchment will remain a drag over the coming years, but slowing inflation and gradually recovering export demand from 2012 will shore up consumption and exports and support an initially weak recovery,” it said.

“As consumer confidence improves and real incomes start to rise, consumption growth will gain strength over 2012. In 2013, rising business confidence and increasing capacity utilisation will support business investment, quickening the recovery.”

One additional risk is that, if conditions worsen materially, the Government may have to nationalise the banks. “More stringent regulations and potentially surging losses could force further recapitalisation of banks, preferably through private capital. However, the government should be prepared to step in if private capital fails to materialise,” the OECD warned.

A Treasury spokesman said: “The OECD today reconfirms its support for the Government’s deficit reduction plan. The UK economy is not immune to the turbulence in the eurozone and its impact on British businesses, but the difficult decisions taken by the Government has made the UK a relative safe haven in the sovereign debt storm and helping to keep interest rates at record low levels for businesses and households. The Government is using all levers to protect the UK economy.”